Starting a business in 2017? Great news! But before you get carried away with your idea, consider these legal points for the first 100 days.
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When establishing a new company there are a tremendous number of legal considerations which, if not navigated upfront, can increase the risk of problems cropping up in the future.
At the beginning, it’s important to limit your liability to protect your exposure to any personal financial risk. This can be achieved by establishing a separate legal personality to the founders. The most commonly used vehicle for start-ups is a private limited company.
Head to Companies House and choose an available company name and register your company.
You’ll also need to adopt articles of association, which is the company’s internal “rule book”.
On incorporation, you can choose to adopt standard form model articles without having to have a specifically tailored version. Private limited companies need a least one person (not a company) appointed as a director, and every director has certain duties imposed on them, which are owed to the company.
If there’s more than one founder, you should consider a shareholders’ agreement setting out the relationship between the shareholders and their respective rights and obligations.
This should cover key matters, including the board composition, what happens to a founder’s shares if he leaves the business, and giving the majority of the shareholders the right to “drag” the minority (oblige them to sell their shares) if the majority accepts an offer from a third party to buy the company.
Find out what is already ‘taken’ by others in your chosen industry and key territories. Being mindful of what’s already out there should hopefully avoid disputes or the need to undertake an expensive re-brand further down the line.
Protecting your IP stops others pinching your ideas
Bear in mind it’s not just identical marks you need to steer clear of; someone with a confusingly similar mark and operating in the same field, might be able to prevent you using your chosen brand.
Applying for a trademark is also a worthwhile consideration, as it can help to brand identity, reputation and value.
Simply registering a domain name for your chosen name is unlikely to give you rights that you can rely upon in contrast to a third party with a trade mark registration: the domain name being available is unfortunately not a reliable green light.
New inventions can also be protected by filing for patents. Like trademarks, patents are jurisdictional and enforceable in only those countries where you obtain a patent. They give you a 20-year-right to stop third parties carrying out the invention you describe.
Unfortunately, patents are expensive to obtain and mean you have to disclose your idea to the world, whereas it may be preferable to rely on keeping your invention secret.
Confidentiality agreements and operational contracts
Before discussing any opportunities with suppliers or customers, it’s advisable to consider putting in place a confidentiality agreement.
It’s also important to draft terms and conditions to govern the sale of your product or the supply of your service. Terms and conditions should at the very least:
(i) set clear rights and obligations for both parties, including how you will deliver the products or provide the services, and any payment obligations on the customer;
(ii) allocate liability for when things go wrong, and how and where the parties will resolve disputes (ideally in the English courts); and
(iii) cover provisions such as how the parties can terminate the contract, and what law will apply to your agreement (English law is a safe bet).
Complying with data protection regulation
If you are controlling or processing any personal data, you’ll need to comply with data protection legislation. As we’ve seen with recent high profile hacks such as the TalkTalk incident, an awareness of cyber security risks is important, especially if you’re developing a new product that might be exposed to a cyber-attack.
Even though a contractor (or freelancer) might seem like an attractive option as they aren’t afforded the same employment rights as employees, and therefore reduce employment costs, be mindful that HMRC will scrutinise the reality of these arrangements.
If HMRC thinks your freelancer is actually your employee, you may be liable for certain employment costs (e.g. any unpaid income tax). Also, don’t forget that freelancers own the IP they create unless your contract provides otherwise.
Freelancers are a great way to cut costs, but only in the right circumstances
Employers must also comply with a raft of obligations: from statutory leave and minimum rest breaks, to minimum pension contributions, wages and sick pay. Employees are entitled to a basic written “section 1 statement” of their employment terms.
While this may be appropriate for junior employees, it doesn’t provide more sophisticated protection around confidentiality, IP or post-termination competition. An employment contract is your opportunity to set more comprehensive boundaries and protections.
Employers must register as an employer with HMRC to deduct income tax and national insurance contributions through payroll. As an employer, you’re legally obliged to have in place employer’s liability insurance cover (for at least £5 million) and if you employ more than 5 people, a written health and safety policy.
As you grow you will want to put in place policies dealing with other aspects of the employment relationship, for example: equal opportunities, IT/communications use and family leave.
Finally, if you have identified a non-EEA national as being key to your business in the UK, then you should think carefully about how to employ them here legally. At all stages of the employment lifecycle, be mindful of your anti-discrimination obligations.
It’s clear that start-ups face a significant legal burden, which can seem overwhelming for first-time entrepreneurs. Founders often have limited resources to manage all that it takes to start a company, establish a brand and take their concept to market. Therefore, it’s no surprise that legal issues sometimes fall to the bottom of the list.
If you are unsure where you stand, you should seek independent legal advice. All too often, legal processes which are ignored at the start of a company’s life become serious issues when the founders are looking to raise finance or sell the business.